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N.Y. investment firm targets local rental properties

Published: Tuesday, February 19, 2013 at 9:59 a.m.

Last Modified: Tuesday, February 19, 2013 at 7:11 p.m.

A second New York investment firm with abundant buying power is snatching up Southwest Florida residential properties for rentals, a trend that has sparked some fear that another real estate bubble could be forming in the region.

Fundamental REO is the latest in a series of institutional investment firms that have embarked on buying sprees of distressed homes in Sarasota and Manatee counties since last fall — a vast shift away from the boom-time trend of individual investors flipping houses for quick profit.

Market watchers contend that these rental investors have the potential to dramatically alter Southwest Florida’s real estate landscape in 2013 and beyond, by reducing an already tight housing supply and pushing out traditional home buyers who cannot compete with cash-heavy hedge funds.

Others believe the presence of aggressive, institutional buyers could spur a dangerous run-up in home prices, like those of the mid-2000s that ultimately resulted in value declines of roughly 60 percent regionwide.

“This is going to continue over the next two or three years, as foreclosures accelerate,” said Jack McCabe, a Deerfield Beach housing consultant. “Most Floridians and Americans, by and large, will not be able to compete. The investors seem to be grossly overpaying for these units and inflating prices above what they should be.”

New York-based Fundamental REO has, since Thanksgiving, bought 14 homes from Parrish to North Port for a total of $1.4 million, records show.

In some cases, the company has purchased the properties at a significant mark-up from prices paid just a short time ago, records show.

The company recently paid $139,000 for a 1,431-square-foot house in Parrish, two months after the previous owner acquired the property for $89,300.

Fundamental focuses on buying distressed real estate across the U.S., according to company data, and court records show it has bought at least 200 rental properties in nine Florida counties. “Our strategy is to acquire, lease and manage single-family homes with the goal of producing attractive risk-adjusted returns for our investors, while providing outstanding value to our tenants,” Fundamental’s website states.

Curt Schade, who is listed as a Fundamental manager, did not return calls seeking comment.

Fundamental is at least the third large investment firm to target rental properties in Southwest Florida.

Since October, affiliates of a giant New York hedge fund, The Blackstone Group, have bought 276 rental properties in Sarasota and Manatee. And the Minnetonka, Minn.-based Two Harbors Investment Corp. has purchased at least 82 more.

Across the state, institutional investors acquired an estimated 5,300 foreclosures last year — a phenomenon that kicked into high gear after billionaire businessman Warren Buffett said he would do the same thing.

But while Blackstone and others have been active, they apparently have not diminished the appetite among other investors hoping to capitalize on a market uptick and shrinking inventory.

Several other groups, now operating in Tampa, are likely to enter this market by year’s end, said Drew Peterson, a broker associate with Re/Max Alliance Group in Sarasota who deals with bank-owned listings. “They’re going in and getting a lot of stuff that would otherwise go to an end-user,” Peterson said.

“We didn’t see this before, and certainly not on this scale. It’s a good strategy because overpaying a few thousand dollars is not going to make a significant impact in your rate of return over several years.”

Unlike flippers, who strive to buy low and sell high and quickly, investment groups typically have longer-term approaches.

Most investment firms expect yields of 8 percent to 18 percent annually, plus further appreciation that can enhance returns when selling.

“There’s a little bit of irony here because Wall Street was bullied for its role in the housing crisis, and this time, they’re helping clean up the damage that was done by buying these distressed properties in bulk,” said Sean Snaith, an economist with the University of Central Florida. “It’s a less caustic investment than the short-term flip. They tend to hold these for five to seven years.”

The investment giants will likely have plenty to scour in the coming months, the result of an uptick in lender foreclosures that brought 9,310 new defaults into courts in Sarasota, Manatee and Charlotte counties last year — the first time local foreclosure totals rose since 2009, records show.

Marcus Vanzant, owner and broker of Bradenton’s Marcus and Co. Realty, believes the trend is artificially pushing prices higher. Vanzant said he worries that institutional investors are fueling a cycle that could spark another mini-housing bubble, potentially causing the market to bottom out when the same firms decide it is time to sell.

“This is not necessarily a good thing,” Vanzant said. “The problem is what’s going to happen at the end of it all? It’s turning out to be quite a mess for the average home buyer.”

Adding to that fear, banks often favor investors because they pay with cash, speeding transaction closings and pushing aside individual buyers who must often go through a lengthy financing process.

While it is unclear precisely how long the groups will purchase properties here, what is more certain is that supply continues to decline regionwide.

Inventory of available homes for sale has dipped to a decade low — with a 3.9-month supply in Sarasota County and 4.6 months’ worth in Manatee, as of December.

The shortage comes as demand has soared. That same month, sales were up 19 percent, records show.

“It reminds me somewhat of the bubble, except nobody is getting mortgages,” said Shannon Moore, broker and owner of Green Lion Realty in Port Charlotte. “It’s been difficult to get anything, because you cannot compete when they’re paying way over market value. It’s false inflation.”

Although the rental market has had gains of late, at least some industry observers also question whether rentals can continue to generate the kind of profit margins the investment groups anticipate.

Rentals have surged in Southwest Florida and elsewhere because many borrowers with bruised credit scores are being forced into them. They often cannot buy another home.

Still, many of the firms scouting Southwest Florida may have been overzealous in their projections. Average residential leases in Sarasota currently run about 92 cents per square foot. A year ago, that figure was 84 cents, according to Sarasota Management & Leasing.

“I just had to tell an investor today that the rent they were asking was much higher than the market would bear,” said Scott Corbridge, the rental firm’s broker.

<p>A second New York investment firm with abundant buying power is snatching up Southwest Florida residential properties for rentals, a trend that has sparked some fear that another real estate bubble could be forming in the region.</p><p>Fundamental REO is the latest in a series of institutional investment firms that have embarked on buying sprees of distressed homes in Sarasota and Manatee counties since last fall — a vast shift away from the boom-time trend of individual investors flipping houses for quick profit. </p><p>Market watchers contend that these rental investors have the potential to dramatically alter Southwest Florida's real estate landscape in 2013 and beyond, by reducing an already tight housing supply and pushing out traditional home buyers who cannot compete with cash-heavy hedge funds.</p><p>Others believe the presence of aggressive, institutional buyers could spur a dangerous run-up in home prices, like those of the mid-2000s that ultimately resulted in value declines of roughly 60 percent regionwide.</p><p>“This is going to continue over the next two or three years, as foreclosures accelerate,” said Jack McCabe, a Deerfield Beach housing consultant. “Most Floridians and Americans, by and large, will not be able to compete. The investors seem to be grossly overpaying for these units and inflating prices above what they should be.”</p><p>New York-based Fundamental REO has, since Thanksgiving, bought 14 homes from Parrish to North Port for a total of $1.4 million, records show.</p><p>In some cases, the company has purchased the properties at a significant mark-up from prices paid just a short time ago, records show.</p><p>The company recently paid $139,000 for a 1,431-square-foot house in Parrish, two months after the previous owner acquired the property for $89,300.</p><p>Fundamental focuses on buying distressed real estate across the U.S., according to company data, and court records show it has bought at least 200 rental properties in nine Florida counties. “Our strategy is to acquire, lease and manage single-family homes with the goal of producing attractive risk-adjusted returns for our investors, while providing outstanding value to our tenants,” Fundamental's website states.</p><p>Curt Schade, who is listed as a Fundamental manager, did not return calls seeking comment.</p><p>Fundamental is at least the third large investment firm to target rental properties in Southwest Florida.</p><p>Since October, affiliates of a giant New York hedge fund, The Blackstone Group, have bought 276 rental properties in Sarasota and Manatee. And the Minnetonka, Minn.-based Two Harbors Investment Corp. has purchased at least 82 more.</p><p>Across the state, institutional investors acquired an estimated 5,300 foreclosures last year — a phenomenon that kicked into high gear after billionaire businessman Warren Buffett said he would do the same thing.</p><p>But while Blackstone and others have been active, they apparently have not diminished the appetite among other investors hoping to capitalize on a market uptick and shrinking inventory.</p><p>Several other groups, now operating in Tampa, are likely to enter this market by year's end, said Drew Peterson, a broker associate with Re/Max Alliance Group in Sarasota who deals with bank-owned listings. “They're going in and getting a lot of stuff that would otherwise go to an end-user,” Peterson said.</p><p>“We didn't see this before, and certainly not on this scale. It's a good strategy because overpaying a few thousand dollars is not going to make a significant impact in your rate of return over several years.”</p><p>Unlike flippers, who strive to buy low and sell high and quickly, investment groups typically have longer-term approaches. </p><p>Most investment firms expect yields of 8 percent to 18 percent annually, plus further appreciation that can enhance returns when selling.</p><p>“There's a little bit of irony here because Wall Street was bullied for its role in the housing crisis, and this time, they're helping clean up the damage that was done by buying these distressed properties in bulk,” said Sean Snaith, an economist with the University of Central Florida. “It's a less caustic investment than the short-term flip. They tend to hold these for five to seven years.”</p><p>The investment giants will likely have plenty to scour in the coming months, the result of an uptick in lender foreclosures that brought 9,310 new defaults into courts in Sarasota, Manatee and Charlotte counties last year — the first time local foreclosure totals rose since 2009, records show.</p><p>Marcus Vanzant, owner and broker of Bradenton's Marcus and Co. Realty, believes the trend is artificially pushing prices higher. Vanzant said he worries that institutional investors are fueling a cycle that could spark another mini-housing bubble, potentially causing the market to bottom out when the same firms decide it is time to sell. </p><p>“This is not necessarily a good thing,” Vanzant said. “The problem is what's going to happen at the end of it all? It's turning out to be quite a mess for the average home buyer.”</p><p>Adding to that fear, banks often favor investors because they pay with cash, speeding transaction closings and pushing aside individual buyers who must often go through a lengthy financing process.</p><p>While it is unclear precisely how long the groups will purchase properties here, what is more certain is that supply continues to decline regionwide.</p><p>Inventory of available homes for sale has dipped to a decade low — with a 3.9-month supply in Sarasota County and 4.6 months' worth in Manatee, as of December.</p><p>The shortage comes as demand has soared. That same month, sales were up 19 percent, records show.</p><p>“It reminds me somewhat of the bubble, except nobody is getting mortgages,” said Shannon Moore, broker and owner of Green Lion Realty in Port Charlotte. “It's been difficult to get anything, because you cannot compete when they're paying way over market value. It's false inflation.”</p><p>Although the rental market has had gains of late, at least some industry observers also question whether rentals can continue to generate the kind of profit margins the investment groups anticipate.</p><p>Rentals have surged in Southwest Florida and elsewhere because many borrowers with bruised credit scores are being forced into them. They often cannot buy another home.</p><p>Still, many of the firms scouting Southwest Florida may have been overzealous in their projections. Average residential leases in Sarasota currently run about 92 cents per square foot. A year ago, that figure was 84 cents, according to Sarasota Management & Leasing.</p><p>“I just had to tell an investor today that the rent they were asking was much higher than the market would bear,” said Scott Corbridge, the rental firm's broker.</p><p>Staff writer Michael Braga contributed to this report.</p>